The cornerstone of the European Union’s climate change policy does not deliver the appropriate price signal to trigger low carbon investments, therefore putting climate ambitions at risk.

In its latest report, The Shift Project recommends the implementation of a reserve price for European states to auction their right to emit greenhouse gases.

Urgent action is needed to foster market conditions which are favourable to the energy transition. The implementation of an auction reserve price on CO2 emission allowances means Member States cannot sell their quotas at prices that are too low.

Position Paper (2016)Executive Summary (2016)

The Shift Project supports the EU ETS reform, and in particular the Market Stability Reserve. The MSR will, on the one hand, progressively reduce the surplus of quotas, and could enable the implementation of a cap-neutral price corridor on the other hand.

A price on carbon which is strong, predictable and steadily increasing makes it possible to guarantee foreseeable returns on investments in the low-carbon transition. Investing in emission cuts should be more profitable than paying for emissions.

The energy transition cannot take place without investment predictability. At this time, the market does not provide price signals which are high or credible enough in the short to medium term. This situation fosters investments in carbon-intensive installations which generate emissions through their entire life span, thus jeopardizing the achievement of climate goals.

The Shift Project advocates the implementation of a reserve price which is sufficiently high – 20€ per tonne of CO2, adjusted upwards on a yearly basis – to trigger massive investments into the energy transition. By starting below 30€/t, this price is compatible with measures preventing carbon leakage risks.

Recent scenarios, compatible with the Paris Agreement objectives, point to the need for an increasing price trajectory, well above what can be observed within the EU ETS, with a near-consensus on the need to reach approximately $ 140 (€123)/t of CO2 by 2040.

Even with the implementation of an auction reserve price, such a level is unlikely to be reached through the EU ETS alone. It is therefore essential to maintain and strengthen complementary European measures favouring the climate: carbon performance standards, sectoral taxes (particularly on energy production), support for low-carbon technologies, incentives for sobriety and energy efficiency etc. Each one of these measures contributes to a growing carbon value.

It is also fundamental to drastically reduce fossil fuels subsidies, which are still much higher than renewable energy subsidies, and have risen among countries participating in the EU ETS market (+12% between 2013-2015).